Finance and Constitution Committee

Meeting date: Wednesday, March 13, 2019

Official Report 603KB pdf

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Subordinate Legislation

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Budget (Scotland) Act 2018 Amendment Regulations 2019 [Draft]

The next item of business is to consider the draft Budget (Scotland) Act 2018 Amendment Regulations 2019. We are joined by Kate Forbes, Minister for Public Finance and Digital Economy, and Scott Mackay, head of finance co-ordination in the Scottish Government, whom I welcome to the meeting. Before we formally consider the minister’s motion, we will take evidence on the regulations.

I invite the minister to make an opening statement.

The spring budget revision provides the final opportunity to formally amend the Scottish budget for 2018-19. This year’s budget revision deals with four different types of amendments to the budget: first, a few funding changes; secondly, a significant number of technical adjustments that have no impact on spending power; thirdly, some Whitehall transfers; and, finally, some budget-neutral transfers of resources between portfolio budgets, including a modest budget redirection to ensure that we maximise our available budget. The net impact of all those changes is an increase in the approved budget of £3,576.2 million, from £40,505.9 million to £44,082.1 million. Members will have the numbers in front of them.

Table 1.1 on page 5 of the supporting document, “Scotland’s Budget Documents: The 2018-19 Spring Budget Revision to the Budget (Scotland) Act for the year ending 31 March 2019”, shows the approved budgets following the autumn budget revision and the changes sought in the spring budget revision. The supporting document to the spring budget revision and the brief guide that was prepared by my officials provide background on those changes.

The first set of changes reduces the budget slightly by £3.3 million and comprises funding that has been allocated over a number of lines, as detailed in the brief guide, and is offset by the repayment of £175 million of farmers loans financial transactions. The second and most significant set of changes comprises a number of large technical adjustments to the budget. Those technical adjustments are mainly non-cash and therefore budget neutral, as they cannot be redeployed to support discretionary spend elsewhere, and have a net positive impact of £3,303.8 million on the overall aggregate position. It is necessary to reflect those adjustments to ensure that the budget is consistent with the accounting requirements and with the final outturn that will be reported in the annual accounts.

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By far the largest of those adjustments relates to an increase to the annually managed expenditure provision for future national health service and teachers’ pension costs, which flows from the outcome of the appeal court ruling on the judicial pension scheme and firefighters’ pension scheme discrimination claims. The ruling has significant implications for future costs of unfunded schemes and we have had to adjust the non-cash AME budget by £2.3 billion to meet the potential future costs of remedy. The UK Government is expected to appeal the case further and, although the final position is not likely to be resolved for some time, the adjustment is made on the basis of legal opinion on the probability of a successful appeal.

With regard to Whitehall transfers and allocations, there is a net positive impact on the budget from a number of transfers of £275.7 million, the most significant of which are the transfers of £157.3 million from the Department for Work and Pensions to fund the devolved responsibility for carers allowance and £78 million from the Treasury in respect of the agenda for change health pay award.

The final part of the budget revision concerns the transfer of funds within and between portfolios, with which committee members will be familiar, to better align the budgets with profiled spend. The main transfers between portfolios are noted in the supporting document and the guide.

As we approach the financial year end, we will continue, in line with our normal practice, to monitor forecast outturn against budget and, wherever possible, seek to utilise any emerging underspend to ensure that we make optimum use of the resources that are available this year and manage the necessary carry forward to meet additional spending commitments, as disclosed in our draft spending plans.

In line with the budget process review group’s recommendations, my officials have included in the brief guide that was sent to the committee an indication of the forecast outturn position at 31 January. That is the latest position that was available when the brief guide was prepared and it has, I hope, given the committee the best view of the emerging position. Provisional outturn figures will be announced by the Cabinet Secretary for Finance, Economy and Fair Work in early June. I hope that colleagues have found the guide helpful, although, as always, we are open to suggestions of ways to make it even more helpful.

I will start off on that point. It is helpful that the guide was introduced as part of the budget process review and that the information is now available. You will appreciate that there is still a challenge for the committee, whether in the area of underspends or the Scotland reserve, given the continually moving picture, although we appreciate why that is the case. In order to carry out our scrutiny role more effectively, when the final balance of, for instance, the reserve is published in June, will you be able to provide the committee with a table that details all the movements in the reserve throughout the year, to make the information available to us? Although I recognise that more movement may yet transpire, can you say at this stage how much of the reserve will be available to meet any of the potential shortfall that may come from the reconciliation process in relation to income tax and the fully devolved taxes once the outturn figures are available in July, which will be an important moment?

In principle, I am happy to provide the committee with the final figures. With regard to the committee getting its head round the figures that are in front of us, members will be aware that the position changes regularly. We were keen to give you the most up-to-date position, but we recognise that it means that reconciliation can be a challenge. I am happy to commit to provide more information.

You mentioned the devolved taxes and the need for reconciliation. With the first reconciliation due next year, as the brief guide states, part of the forecast residual balance is devolved taxes income of £136.2 million, to ensure that we are prepared for reconciliation.

Is the £136.2 million in the reserve for that purpose, if it turns out that the estimate is correct?

That is the forecast.

That is the forecast of the surplus tax receipts that we are holding in the reserve.

That is clear—thank you.

Good morning, minister. Following up on the convener’s question, I am looking at the forecast residual balance for 2019-20 in the table in annex C of the brief guide. The forecast balance of £300.2 million is broken down in that table. You have just explained the £136 million of devolved taxes income. There is also £85.5 million of balance set aside to fund spending commitments. Can you explain what those spending commitments are?

Yes. Members will be aware of recent coverage of the teachers’ pay dispute. The balance that is set aside for future spending commitments will likely be used to support known pressures such as the teachers’ pay agreement.

So it is not tied to a specific ask at the moment but is a kind of float to deal with things that might arise in future.

In the spirit of managing our finances prudently, we recognise that, during the year, there will be emerging challenges that need to be met. That is reflected in the residual balance.

Thank you. I have one more question. The figure for financial transactions is £78.5 million. Where does that arise from? Is it Treasury Barnett consequentials?

After allowing for additional spending commitments of £47.5 million in 2019-20, those financial transactions are—

Principally, it is repayments of farmers’ loans that are going into that balance.

I presume that there are restrictions on what that money can be used for.

Yes.

Yes, and activity is in hand to explore how we can best deploy it in 2019-20.

Thank you.

I have a small question on the residual balance in the reserve. Does the £300 million include the £54 million that was transferred to the reserve as part of the information that was released by the cabinet secretary at stage 3 of the budget?

That is the balance of the additional consequentials that were received very late on as a result of the UK supplementary estimate. We tried to show the net position in that table, so the £300 million effectively includes that remaining balance.

That is clear. It is obviously included in one of the other lines, so where is it?

Under the 2019-20 spending commitments, the table shows the £313.5 million of expenditure commitments in the budget bill and the stage 2 additional funding of £94 million, which gives £407.5 million. We have brought in those late additional budget consequentials, offsetting them against the additional spending commitments, which leaves the pot that is shown at the bottom of that section. We brought in the full amount to arrive at the remaining balance.

I am not trying to be awkward; I just want to understand it. You say that you have “brought in” that amount, so where is the £54 million included in the table?

It is the difference between the £148 million that was brought in and the £94 million that was already allocated. The balance of £54 million is effectively supporting wider expenditure. The way that it is reflected is that it just comes down into the balance.

It has been deducted from that line. Okay, that is fine.

In terms of portfolio movements, there was £43 million of underspend or credit in relation to capital housing receipts. Can you give us the background to that?

That is income from repayments of financial transactions for the year. They are shown as negative expenditure, so they look like a reduction in expenditure. They are currently estimated at £43 million, which is made up of £29 million of shared equity receipts, £10 million of charitable bond receipts and £4 million of other FT receipts. Estimates for the year have been made from the various trends to date and known scheduled repayments.

Sorry, but why is it a negative?

It is income from repayments of FTs, so it is shown as negative expenditure. It looks like a reduction in expenditure, but it is presentational in terms of it being income from repayments of FTs.

Sorry but, if it is income, I still do not understand why it is being shown as a negative.

That is just the way that income is shown; it is reflected as a minus. The idea is that the income offsets expenditure, so it allows further expenditure.

Okay—I understand.

In the enterprise budget, a £56 million underspend has been released elsewhere. What is the reason for that?

I will go into detail on that. It is a mix of transfers, so I will go through each aspect. On the resource reductions, there is £6 million of underspend in relation to enterprise zones, as a result of the full construction and operation contract not being expected to be in place between Scottish Enterprise and Strathclyde until after a stage 4 review in late January 2019, which was later than initially forecast. That is offset by £5 million, which was deployed to the innovation and industries programme to cover the costs of a fire recovery fund.

In terms of the capital financial transactions, there is a reduction of £55 million, which is a release of £28 million of emerging or planned underspend in FTs in relation to the Scottish-European growth co-investment project and the European investment fund; and there is another £25 million of FTs that is a transfer to the communities and local government portfolio in relation to investment in the Scottish partnership for regeneration in urban centres—or SPRUCE, as it is more commonly known. That transfer of funds is for the first building Scotland fund investment into SPRUCE, which is seeking to complete a number of commercial and industrial property investments by using that investment this year.

Thank you.

I want to ask about the £3 million receipt from the UK Treasury for policing for the presidential visit. Is that a fair and accurate estimate of the policing costs for that visit? Do we have to claim that? I remember a bit of discussion about whether Police Scotland was able to reclaim that money.

It is a Whitehall or UK Government Treasury transfer to cover those costs. You will remember some of the noises at the time of the presidential visit. I cannot remember what cabinet secretary it was who wrote to say that, as the presidential visit was not at the Scottish Government’s invitation, the costs should be covered by the Treasury. The transfer recognises that commitment.

Thank you.

As there are no other questions, we move to item 3, which is consideration of the motion. I invite the minister to move motion S5M-16046.

Motion moved,

That the Finance and Constitution Committee recommends that the Budget (Scotland) Act 2018 Amendment Regulations 2019 [draft] be approved.—[Kate Forbes]

Motion agreed to.

I thank the witnesses for their contribution. It was a useful discussion and we will publish a report to the Parliament later today setting out our decision.

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Scottish Landfill Tax (Standard Rate and Lower Rate) Order 2019 SSI 2019/58

Item 4 is to consider another piece of subordinate legislation. We are again joined by Kate Forbes, the Minister for Public Finance and Digital Economy, who is accompanied by Ewan Cameron-Nielsen from the Scottish Government finance directorate. Before we come to the formal consideration of the minister’s motion, we will take evidence on the order. Again, I welcome the witnesses to the meeting and I invite the minister to make an opening statement, if she wishes.

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The order specifies revised amounts for the standard rate and the lower rate—the figures are in front of members. The proposed rates will have effect from 1 April 2019. Members will wish to note that they match the UK landfill tax rates for 2019-20 as set out in the Finance Act 2019, because we want to avoid any potential for waste tourism—that is a new phrase that I learned this week—to emerge as a result of material differences between tax rates north and south of the border.

I am interested in the underlying policy and rationale for the taxation rates and in the Scottish Landfill Tax (Qualifying Materials) Order 2016, although I appreciate that that is a sister instrument. There is a recycling business in my constituency called Brewster Bros, which is an aggregates supply company. It recycles and reuses things such as waste soils and inert waste, which attract the lower rate of landfill taxation.

To put it simply, I understand that dumping soils remains—in the company’s words—too cheap and that the applicable lower tax rate contradicts the approach of the circular economy, as it is easier to dump soils. I appreciate that soils are less polluting than other materials and that it is unusual for people to argue for increased taxation but, given that we do not want to waste any resource, does the Government have plans to review the number of bands and the qualifying materials that slot into the taxation rates?

We keep all that under review. Your point touches on the key issue that the tax tries to achieve two objectives—it is perhaps the only tax for which we want a reduction in the revenue that it raises, because that would demonstrate that the tax was having the intended impact of reducing landfill.

It is clear from the figures over the past decade that total landfill volume has fallen. The SFC’s forecast for the next five years shows decreasing revenue from the tax, which demonstrates the intended impact. However, in light of the objectives of the tax, we will certainly keep the rates under review. One reason for changing the rates this year is to ensure that we achieve the objectives—to ensure that materials are not just moved across a border but that we reduce the overall amount of landfill.

The example that you gave touches on the key objectives of the tax, which are to bring in revenue and to reduce landfill. We know that landfill volume is decreasing, which is good, and we know that the revenue forecasts are decreasing, which is—ironically—good. However, we need to keep an eye on unintended consequences and particularly on the impact on companies’ behaviour.

I appreciate the minister’s point that the situation is kept under constant review, but will a more granular look be taken in the short to medium term at unintended consequences?

That must be done in conjunction with the Cabinet Secretary for Environment, Climate Change and Land Reform. She and Mr Mackay will meet again in the not-too-distant future to discuss how their portfolios are managing the tax to ensure that it reaches its objectives.

I neglected to bring Alex Burnett into the previous discussion—forgive me, Alex.

My question for the previous session was answered.

We support the aims of the landfill tax, but an unfortunate consequence has been an increase in fly-tipping. How will the additional revenue go to bodies, such as councils, that have to deal with that?

As with all sources of revenue, funds are redistributed to local authorities. I recognise that, on such an issue, a partnership approach must be taken with local authorities, because they often manage and do the collections.

The Scottish Environment Protection Agency has a key role when it comes to fly-tipping. It launched its campaign in the middle of last year to raise awareness of fly-tipping and make clear what the fines are for it.

Other public bodies in Scotland, working well together, also have a role to play. Revenue Scotland has developed a reputation for better compliance because it works so closely with SEPA. On landfill tax in particular, the levels of compliance are improving significantly because of that partnership. That is probably the key way in which we will get a grip on fly-tipping, as well as through resourcing local authorities.

You mentioned the Fiscal Commission forecasts on landfill tax, which are based on a central assumption that the ban on biodegradable waste going to landfill in 2021 will be implemented.

You will be aware that, late last month, the Convention of Scottish Local Authorities expressed serious doubts about that. It thinks that it is unlikely that the ban can be achieved in the expected timescale. If the ban is implemented, that will continue to reduce the revenue from landfill tax; if it is not, more revenue may be raised but the policy objective will not be achieved.

What assumption is the Scottish Government working on? Is it working on the assumption that the ban will be fully implemented in 2021 as planned? If that happens, revenue will take a big hit, but one of the consequences will be more recyclable waste going to incineration, which does not have a place in a truly circular economy either.

The UK Government has indicated that it intends to consider the option of introducing a tax on the incineration of waste. Is the Scottish Government considering that option and has it discussed the potential for a necessary transfer of powers to implement such a policy?

There are a lot of questions in there, but I will try to take them one by one. First, I am aware of the points that Patrick Harvie raises. The ban has been set out in legislation since 2012, so it is disappointing that, although local authorities have had significant time to prepare, there is still uncertainty about the readiness of some councils.

We know that 14 local authorities have long-term solutions in place, including major authorities such as Glasgow, Edinburgh and Dundee. Other authorities have interim solutions in place. Our focus is on trying to work with the authorities that do not have a solution in place to identify ways to comply with the ban as soon as possible, such as using collaborative procurement and improved recycling.

Some of those questions are for the Cabinet Secretary for Environment, Climate Change and Land Reform. However, I can say that our intention is still to implement the ban, as set out in legislation since 2012. That was reflected in the Scottish Fiscal Commission’s most recent forecast. We continue to work with COSLA and local authority waste management services to try to address that challenge. However, our policy still prioritises waste reduction, which is reflected in the forecasts.

On additional taxes, as far as I know, we have a rolling programme of work looking at further devolution of taxes and how we can improve our current tax regime. Any changes in the area have to be made in collaboration with the environment secretary. It is one of those areas where we can achieve multiple policy objectives if we work together closely.

Given that you are concerned about waste tourism as a possible threat, I presume that, if the UK Government looked at a wider disposal tax, there would be a real need for Scotland to have the power to do the same.

Absolutely. Again, it is about those unintended consequences as a result of having only partial devolution of taxes, when we have full devolution of environmental policies. If we were hamstrung by not having the tax powers to be able to control waste tourism, for example, that would significantly hinder our environmental policies and objectives.

I do not understand the language of being “hamstrung”. Ever since the Calman commission and the introduction of section 80B of the Scotland Act 1998, this Parliament has had the power to create new taxes; we already have that power.

As I just said, the Scottish Government is carrying out a rolling programme of work on how we can improve our current taxes and increase the devolution of taxes. The point that I was trying to make is that, if we have two portfolios that are both trying to achieve two similar objectives, they have to work together and the tax regime has to reflect the environmental policy objectives.

Right, but, just to be clear, it is not about future devolution of powers that the Parliament does not yet have; it is about the Government exercising powers which the Parliament already has.

It is about making sure that we use our current powers but, in relation to Patrick Harvie’s point, if the UK Government was to introduce a new tax—a good example at the moment is its consideration of a digital services tax—our priority would be to look at what impact that would have on Scotland and to respond appropriately.

As there are no further questions, we move to consideration of the motion on the order, which is motion S5M-16045.

Motion moved,

That the Finance and Constitution Committee recommends that the Scottish Landfill Tax (Standard Rate and Lower Rate) Order 2019 be approved.—[Kate Forbes]

Motion agreed to.

I thank our witnesses for their contribution to the discussion. We will publish a report to Parliament setting out our decision on the order later today.

Meeting closed at 11:27.